CIS Scheme Explained: Deduction Rates, Gross Payment Status & Monthly Returns

Summary

CIS (Construction Industry Scheme) is HMRC's mechanism for collecting tax at source from self-employed construction workers. It affects anyone who works in the construction industry as a contractor or subcontractor — which, under HMRC's broad definition, covers not just builders and electricians but also surveyors, architects, and labour agencies if they supply workers in construction.

The scheme is often misunderstood by tradespeople who think it is optional or who confuse CIS deductions with being employed. CIS deductions are advance payments of income tax — they are credited against the subcontractor's Self Assessment tax bill at year end. The subcontractor still files their own tax return and may get some of the deducted tax refunded if their total tax liability is less than the deductions paid.

For contractors (anyone who pays subcontractors), CIS creates significant administrative obligations: verify every subcontractor with HMRC before payment, deduct at the correct rate, submit monthly returns, and issue monthly payment and deduction statements to subcontractors. Failing to do this correctly results in HMRC holding the contractor jointly liable for unpaid tax.

Key Facts

• Standard deduction rate — 20% from payments to registered subcontractors (labour element only — not materials)
• Higher deduction rate — 30% from unregistered subcontractors. Always verify before first payment
• Gross payment status (GPS) — 0% deduction. Available to subcontractors who pass HMRC's annual compliance test: filed all tax returns on time, paid all tax on time, minimum 3 years trading, and minimum turnover threshold (£30,000 for sole traders, £100,000 for partnerships, £200,000 for companies in the last 3 years — [verify with HMRC as thresholds change])
• Materials excluded — CIS deductions apply only to labour. If a subcontractor charges £10,000 of which £4,000 is materials, deduct 20% of £6,000 = £1,200, not 20% of £10,000
• Verification — Contractor must verify every new subcontractor with HMRC before making the first payment. Verify at: www.tax.service.gov.uk/verify-subcontractor or by calling HMRC. Verification result: GPS (0%), standard (20%), or higher (30%)
• CIS300 monthly return — Must be submitted to HMRC by the 19th of each month following the tax month (6th to 5th). Online filing required
• Payment statement — Must be issued to each subcontractor each tax month in which payment was made. Shows gross payment, CIS deduction, net payment
• Employment status — CIS does not make someone employed. A subcontractor under CIS remains self-employed. Employment status is a separate test (IR35/CEST tool)
• Reverse charge VAT — Since March 2021, VAT domestic reverse charge applies to CIS transactions where both parties are VAT registered. The customer accounts for the VAT rather than the supplier

Quick Reference Table

Detailed Guidance

Registering for CIS

As a subcontractor: Register with HMRC online via your Government Gateway account. You will need: your Unique Taxpayer Reference (UTR), National Insurance number (for sole traders), and company registration number (for limited companies). Registration is free and takes approximately 2 weeks.

As a contractor: Register via the Government Gateway and enrol for the CIS scheme. You will then be able to verify subcontractors, submit monthly returns, and pay deductions.

A sole trader who also uses subcontractors is both a subcontractor (in their own UTR capacity) and a contractor (for the purposes of subcontractors they pay). Both registrations are required.

Verifying Subcontractors

Before making the first payment to a new subcontractor, you must verify their CIS status with HMRC. You need:

• Their UTR (Unique Taxpayer Reference)
• Their full name (sole trader) or company name and registration number (limited company)
• Their National Insurance number (sole traders only)

Online verification: Log into HMRC's business tax account, go to the CIS section, and verify. The result is returned immediately. Keep a record of the verification result and date.

Telephone verification: Call HMRC's CIS helpline: 0300 200 3210.

If a subcontractor cannot provide a UTR, they are almost certainly not registered — deduct at 30%. Do not accept a National Insurance number as a substitute for a UTR.

Calculating the Deduction

The deduction applies only to the labour element of payments. Materials costs (actual cost price of materials — not markup) are excluded.

Example:

• Subcontractor invoice: £6,000 labour + £2,000 materials = £8,000 gross
• CIS deduction (20%): £6,000 × 20% = £1,200
• Net payment: £8,000 - £1,200 = £6,800

The subcontractor must be able to demonstrate the materials cost (receipts, delivery notes). If materials are bundled into a single price without separation, HMRC may treat the whole amount as labour.

If the subcontractor is VAT registered, apply CIS deduction to the VAT-exclusive amount (not including VAT). VAT is paid in full (subject to reverse charge rules — see below).

VAT Domestic Reverse Charge

Since 1 March 2021, the VAT domestic reverse charge applies to most CIS transactions where:

• Both contractor and subcontractor are VAT registered
• The services are standard-rated or reduced-rated supplies
• The transaction is within the CIS scheme

Under reverse charge: the subcontractor does NOT charge VAT on the invoice. The contractor accounts for the VAT as both output (payable) and input (reclaimable) tax on their own VAT return. Net VAT effect is usually zero for the contractor, but the cash flow difference for the subcontractor (no longer collecting VAT upfront) can be significant.

Invoices under reverse charge must state: "Reverse charge: Customer to account for VAT to HMRC".

Exceptions: Reverse charge does not apply if the customer is an end user (domestic consumer), the supplier makes supplies wholly to end users, or the supplier is under the VAT threshold.

Monthly CIS Return (CIS300)

The CIS300 return covers the tax month (6th to 5th of following month) and must be submitted online by the 19th of the following month.

The return shows:

• Each subcontractor paid in the month (UTR, name, gross amount, materials, deduction)
• Total deductions made

You must pay the total deductions to HMRC by the 19th of the same month (or by cheque by the 19th, BACS by the 22nd).

Nil returns: If you did not pay any subcontractors in a tax month, you must still file a nil CIS300 return. Failure to file results in automatic penalties.

Penalties for late return:

• 1 day late: £100
• 2 months late: £200
• 6 months late: £300 or 5% of tax due (whichever is higher)
• 12 months late: £300 or 5% of tax due (whichever is higher)
• After 12 months: additional 5% penalties

Applying for Gross Payment Status

GPS allows subcontractors to receive full payment with no CIS deductions. This is a significant cash flow benefit.

Eligibility requirements:

1. Registered with HMRC for CIS minimum 3 months (or 12 months for GPS)
2. Filed all Self Assessment returns on time for at least 3 years
3. Paid all tax and NI on time for at least 3 years
4. Minimum turnover thresholds (see Key Facts above — verify current thresholds with HMRC as they change)
5. Business carried on in the UK

HMRC conducts an annual review of GPS holders. If compliance falls below standard (a late return, missed payment), GPS can be revoked with 90 days notice.

Apply via Government Gateway or write to HMRC CIS office. Allow 4–6 weeks for processing.

Frequently Asked Questions

Is my limited company required to register for CIS?

If your limited company pays subcontractors for construction work, yes — you must register as a contractor regardless of company size. Even a one-person limited company that occasionally uses a subcontractor must register. Failure to operate CIS when required means HMRC can assess the contractor for the unpaid deductions.

Can I offset CIS deductions suffered against my PAYE if I'm a limited company?

Yes. Limited companies that have CIS deductions made by contractors can offset them against employer PAYE/NI payments to HMRC. This requires registering for the "net payment" scheme — complete form CIS132. In practice, this reduces the amount of PAYE your company sends to HMRC each month by the amount of CIS deductions you've suffered.

My subcontractor says they have Gross Payment Status but won't show me the verification. What do I do?

Always verify directly with HMRC — do not take the subcontractor's word for it. GPS can be revoked at any time and a subcontractor may not know their status has changed. Log into HMRC online verification and verify the UTR yourself. If the result is GPS, pay gross. If not, deduct at 20%.

Does CIS apply to domestic customers?

No. CIS only applies when the contractor is in business (not a domestic household). If you do a kitchen extension for a homeowner, they are not a contractor and do not operate CIS. If the same work is done for a company that rents out residential properties as its business, the company IS a contractor and must operate CIS.

Regulations & Standards

• Finance Act 2004 (Part 3) — Statutory basis for the Construction Industry Scheme

• Income Tax (Construction Industry Scheme) Regulations 2005 (SI 2005/2045) — Detailed CIS operating requirements

• HMRC CIS340 Guide — The primary HMRC guidance document for operating CIS

• VAT (Domestic Reverse Charge) Regulations 2019 — Reverse charge VAT for construction services

• HMRC CIS Guide (CIS340) — Official HMRC guidance on operating the scheme

• HMRC Verify Subcontractors Online — Online verification portal

• HMRC CIS Helpline — 0300 200 3210

• self employment tax — Self Assessment and tax obligations for sole traders

• subcontractors — Using subcontractors: employment status and contracts

• vat for trades — VAT registration and the domestic reverse charge

• invoicing — CIS-compliant invoice requirements